Preparation levels indicate nobody seriously expects a no-deal Brexit
Just because a backstop deal is reached does not mean the risk of a the UK crashing out will disappear
Pro-Brexit supporters demonstrate against the so-called chequers deal as MP’s arrive for a political cabinet at Downing Street in London, Britain 16 October 2018. EPA/NEIL HALL
The government is well aware of the country’s economic exposure to Brexit. Research by Finance Minister Paschal Donohoe’s own department shows the importance of the UK as an export market for Ireland. One in every seven euros earned by Irish goods exporters comes directly from the UK, and it’s even higher for services - one in five.
A particular worry is that Ireland’s largest goods-exporting sectors are the ones most exposed to Brexit. This includes the Pharmachem sector, which is also the largest contributor to corporation tax receipts. A no-deal Brexit would have severe knock-on effects that would make Mr Donohoe rethink his recent budget.
There is no Brexit outcome that is economically good for Ireland, but some are definitely worse than others. According to the Economic and Social Research Institute (ESRI), if the UK remained in the European Economic Area (EEA) the Irish economy would be around 2.5 percent smaller over ten years than if the UK remained in the EU.
ESRI didn’t model a no-deal scenario, but a smooth transition to World Trade Organisation (WTO) terms would lead to the Irish economy being about 4 per cent smaller. And the WTO scenario doesn’t take into account the legal, political and economic chaos that no deal would entail.
This accords with our own analysis at The UK in a Changing Europe, which suggests 10 per cent of the Irish economy is at risk from Brexit, compared with an average of 2.5 per cent for the rest of the EU - second only to the UK itself.
These numbers are calculated by comparing the current situation with what would happen if all UK-EU trade stopped. These figures should not, of course, be taken too literally, but their overall message is serious: Ireland is four times more exposed to Brexit than the average EU country. For agricultural industries 20-30 per cent of their trade is at risk, alongside about 20 per cent for manufacturing.
All in all, the incentives to minimise this damage are obviously very strong.
Yet, the Irish government’s preparations for a no deal outcome are lax at best. Delivering the budget last week, Minister Donohoe said: “Across the Government the necessary measures to prepare for Brexit are being put in place. These plans are based on a central case that there will be agreement in the coming weeks (emphasis added). However, the possibility of a no-deal Brexit has influenced decisions we have made on our finances, balancing our books and investing in our capital infrastructure.”
In other words, a no deal Brexit is a background risk, but it is not a major driver of government plans. By bringing the government finances towards structural balance by next year, the country would be in decent shape to respond to any challenges that arose from Brexit. Alongside the minister’s planned rainy day fund, which is set to reach €3 billion by 2021, the government would be resilient against any economic shocks, of which Brexit could be one. This seems complacent.
Donohoe also said that €110 million had been allocated to Brexit measures across government. This amounts to just 0.16 per cent of total government spending for 2019. By comparison, the UK treasury has set aside about €2.3 billion, which amounts to about 0.25 per cent of UK government annual spending - and the UK itself is hardly prepared for no deal.
What all this shows is that neither side is seriously contemplating ending up with no deal. Granted, the UK has stepped up its preparations over summer, with the release of dozens of technical notices for businesses. But these were a plain recognition that such an outcome would be disastrous for the UK and that it would still rely on the EU to reach interim deals to mitigate the damage.
The trouble for Ireland is that avoiding no deal is not just within the gift of negotiators and Irish officials. Just because a deal is reached does not mean the risk of a no deal exit will disappear. Far from it. If either the EU institutions or, much more likely, the UK parliament rejects the deal, we could still end up with no deal.
It is difficult currently to see a majority in the UK parliament for any deal Theresa May comes back with, and increasing talk of her relying on opposition Labour votes smacks of desperation that could easily backfire. It would seem foolish for the Irish government to rely on a UK prime minister in such a weak position in order to avoid a no deal that the country is not prepared for.
What’s more better preparations would send a powerful signal to the UK that Ireland could not be threatened by the UK with a kamikaze no deal.
Of course, the social implications of no deal at the border could be even greater than the economic impacts, but the latter would undoubtedly be severe as well. Ultimately, regardless of the measures the Irish and UK governments put in place, it may never be possible to be completely ready for no deal. Both sides are doing the minimum in the belief that it is not an option. But just because both governments don’t want it to happen doesn’t mean that it won’t.
Matt Bevington, policy researcher The UK in a Changing Europe